A couple of recent news articles on neuroeconomics, lead to some surprising insights regarding how addictions like Gambling could be self-addictive and how some specific neurological malfunctioning may lead to people fairing better in games of chances and making more ‘rational’ gambles.
The first article in the New Scientist refers to a recent research by Chris Frith et al at University College London, UK in which the authors found that people who had been given dopamine agonists (like L-DOPA) were able to determine the winning strategy involved in a gambling game early then those who were given placebo. The study contained choosing symbols – some of whom were associated with large chances of winning, while others were associated with average chances and still others were associated with financial penalties and should ideally be learned as avoidable symbols.
What they found was that dopamine facilitated the early learning of the symbols that were associated with (monetary) winning outcomes or rewards as compared to controls, but had no effect on the learning of the avoiding or punishment symbols. This, they hypothesize is due to the fact that people get a Dopamine surge whenever ‘rewarded’ and when base dopamine levels are high (it has already been administered prior to the betting game) this leads to greater strength of dopamine reward signal , thus leading to faster learning of the winning strategy. The fact that dopamine does not affect the learning of negative outcomes, confirms that the effect selective and due to the ‘rewarding’ nature of dopamine as opposed to a general improvement in learning due to dopamine administration.
The participants played a computer game in which they were repeatedly shown pairs of unmatched symbols, and had to choose one or the other without being told anything about them beforehand.
Unknown to the participants, one symbol gave them an 80% higher chance of winning £1, whereas another symbol gave them only a 20% higher chance of winning. Other symbols incurred financial penalties.
The volunteers on dopamine prospered because they identified the winning symbols faster than the haloperidol treated patients. And the winning effect was more pronounced if they actually received money in the study.
The dopamine recipients only noticed winning symbols, however. The chemical did not appear to alert recipients to “losing” symbols.
Learning from losing is controlled by other chemicals in the brain, the most dominant probably being serotonin, a chemical linked with depression, Frith concludes.
This brings up some interesting scenarios. If one has started gambling somehow, then as one keeps gambling further, the successive wins would generate more and more dopamine surges (as baseline dopamine increases after a few wins), the gambler would start identifying the winning patterns, and the strength of winning patterns and rewards associated with them would continue to get stronger in the gambler’s mind; there would be no corresponding effect on the learning of negative or losing strategies by him and consequently his learning would be skewed in such a way that winning outcomes would be disproportionately perceived as being rewarding as compared to the losing outcomes – thus in the gamblers mind loses are processed in a ‘normal’ way ; but wins or winning strategies are perceived differently in the sense that they would be learned more strongly, earlier and more persistently – as each win would result in more and more dopamine surge and thus skew the learning in favor of the winning strategy more and more. this is a vicious circle- the gambler is getting more and more dopamine surge and is also becoming better and better at identifying the winning strategies- thus its difficult to convince him otherwise that he is gambling in vain- what he doesn’t realize that he is not attaching a corresponding increased negative outcome to losses or is learning the losing strategies also at the same rate.
The other article is a good review of the field of neuroeconomics in the New Yorker. It touches on many current issues in neuroeconomics, but what is most relevant to us here is the concept of loss aversion, whereby people perceive losses of what they already have as more aversive than a wasted chance of making an equivalent or more gain. To paraphrase from the article:
If you present people with an even chance of winning a hundred and fifty dollars or losing a hundred dollars, most refuse the gamble, even though it is to their advantage to accept it: if you multiply the odds of winning—fifty per cent—times a hundred and fifty dollars, minus the odds of losing—also fifty per cent—times a hundred dollars, you end up with a gain of twenty-five dollars. If you accepted this bet ten times in a row, you could expect to gain two hundred and fifty dollars. But, when people are presented with it once, a prospective return of a hundred and fifty dollars isn’t enough to compensate them for a possible loss of a hundred dollars. In fact, most people won’t accept the gamble unless the winning stake is raised to two hundred dollars.
Further, the article notes that this loss aversion is due to the fact that under ambiguous situations (or situations that involve probabilistic estimates in face of incomplete information to make the probabilistic judgments), our ’emotional’ brain takes precedence over the ‘rational’ brain and prevents us from making ‘rational’ decisions.
In one study, Camerer and several colleagues performed brain scans on a group of volunteers while they placed bets on whether the next card drawn from a deck would be red or black. In an initial set of trials, the players were told how many red cards and black cards were in the deck, so that they could calculate the probability of the next card’s being a certain color. Then a second set of trials was held, in which the participants were told only the total number of cards in the deck.
The first scenario corresponds to the theoretical ideal: investors facing a set of known risks. The second setup was more like the real world: the players knew something about what might happen, but not very much. As the researchers expected, the players’ brains reacted to the two scenarios differently. With less information to go on, the players exhibited substantially more activity in the amygdala and in the orbitofrontal cortex, which is believed to modulate activity in the amygdala. “The brain doesn’t like ambiguous situations,” Camerer said to me. “When it can’t figure out what is happening, the amygdala transmits fear to the orbitofrontal cortex.”
The results of the experiment suggested that when people are confronted with ambiguity their emotions can overpower their reasoning, leading them to reject risky propositions. This raises the intriguing possibility that people who are less fearful than others might make better investors, which is precisely what George Loewenstein and four other researchers found when they carried out a series of experiments with a group of patients who had suffered brain damage.
Further, the article notes that people with orbitofrontal, right insular or amygdala damage, are less fearful or are less able to integrate the fearful or ’emotional’ response of the brain and are thus able to make decisions that are more risky then their normal counterparts. Thus, the counterintuitive conclusion that damages to these areas may make one a better investor/ gambler etc.
Each of the patients had a lesion in one of three regions of the brain that are central to the processing of emotions: the amygdala, the orbitofrontal cortex, or the right insular cortex. The researchers presented the patients with a series of fifty-fifty gambles, in which they stood to win a dollar-fifty or lose a dollar. This is the type of gamble that people often reject, owing to loss aversion, but the patients with lesions accepted the bets more than eighty per cent of the time, and they ended up making significantly more money than a control group made up of people who had no brain damage. “Clearly, having frontal damage undermines the over-all quality of decision-making,” Loewenstein, Camerer, and Drazen Prelec, a psychologist at M.I.T.’s Sloan School of Management, wrote in the March, 2005, issue of the Journal of Economic Literature. “But there are situations in which frontal damage can result in superior decisions.”
If we club the two studies together, one may come to a surprising conclusion that to become a good speculative investor or gambler you may need to temporarily knock out your parts of the brain involved in emotional decision making (one may use TMS here) and also additionally take a dopamine does to learn the rewarding strategies and actions early on. This may be the only way for us to counter the tyranny of loss aversion that nature has imposed on us and move towards that ideal of Homo Economicus.